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Quarterly update
Each quarter, we provide a summary of newly effective and forthcoming standards as well as other accounting and financial reporting developments. This edition covers current developments released prior to March 31, 2018.
What happened this quarter?
Companies that have calendar year ends and are preparing interim financial statements will need to consider the newly effective standards IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments, as well as other amendments to IFRSs. Further information on these standards and amendments are provided in the section ‘New standards and amendments effective in 2018’.
The interim financial statements will be prepared in accordance with the recognition and measurement requirements of IFRS 9 and IFRS 15, as well as other amendments effective in 2018. In addition to the new disclosures that are explicitly required in condensed interim financial statements, companies will have to apply significant judgement in determining how much additional disclosure is necessary to meet the objectives of IAS 34 Interim Financial Reporting. Our recently published 2018 interim illustrative disclosures provide a comprehensive illustration of the potential disclosures.
With the passing of the effective date of IFRS 9 and IFRS 15, it seems like the significant changes are behind us. However, IFRS 16 Leases is not far off with an effective date of January 1, 2019. As the effective date approaches, communication and the disclosures of the expected impact on the financial statements are required as per IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, and are expected by investors and regulators. As the implementation of the new standard progresses,
more information about its impact should be known or reasonably estimable and so entities should be able to provide more entity specific qualitative and quantitative information throughout 2018.
Other activities in the first quarter include the issuance by the International Accounting Standards Board (IASB) of a narrow scope amendment to IAS 19 Employee Benefits, the first meeting of the IFRS 17 Insurance Transition Resource Group and the release of the IASB’s revised Conceptual Framework for Financial Reporting.
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New Standards and Amendments Effective in 2018
Current Quarter Financial Reporting Matters New Guidance – Amendments to IFRSs
• Plan Amendment, Curtailment or Settlement (Amendments to IAS 19 Employee Benefits)
Revised Conceptual Framework for Financial Reporting Other Matters
• LIBOR reforms and the accounting impacts
Previous Quarters’ Financial Reporting Matters New Guidance – Amendments to IFRSs
• Prepayment features with Negative Compensation (Amendments to IFRS 9)
• Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28)
• Annual Improvements to IFRSs 2015-2017 Cycle
IFRIC Updates
• Uncertainty over Income Tax Treatments (IFRIC Interpretation 23)
Looking Ahead IFRS 16 Leases IFRS 17 Insurance Contracts Update on Financial Instruments Projects
Amended and new IFRSs effective date Standards not yet Effective, but Available for Early Adoption Standards Available for Optional Adoption
IASB Work Plan
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New Standards and Amendments Effective in 2018
New Standards and Amendments Effective in 2018
The following table summarizes new standards and amendments to standards that became effective for annual periods beginning on or after January 1, 2018.
New standards and amendments
Recap of new standards and amendments
IFRS 15 Revenue from Contracts with Customers
The new standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. IFRS 15 requires revenue to be recognized when (or as) the entity transfers control of goods or services to a customer at the amount the entity expects to be entitled. New estimates and judgemental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized.
IFRS 15 contains extensive new disclosure requirements (quantitative and qualitative) as well as transitional disclosure requirements.
The standard must be applied using either the retrospective method or the cumulative effect method. In addition, one or more practical expedients are available under each method.
For additional information, refer to KPMG’s web article, that also includes additional links to in-depth analysis.
IFRS 9 Financial Instruments The new standard includes guidance on 1) classification and measurement of financial assets and liabilities; 2) impairment; and 3) general hedging.
IFRS 9 introduces new requirements for the classification and measurement of financial assets. Under IFRS 9, financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows.
For financial liabilities, the classification and measurement requirements of IAS 39 are largely unchanged. The standard introduces changes relating to financial liabilities designated at fair value through profit or loss.
The requirements for financial asset impairment have changed significantly, moving from an ‘incurred loss’ to an ‘expected credit loss’ model. This means that under IFRS 9 – unlike under IAS 39 – a loss event need not occur before an impairment loss is recognized.
IFRS 9 also includes a new general hedge accounting standard which aligns hedge accounting more closely with risk management. The standard does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, however it will provide more hedging strategies that are used for risk management, to qualify for hedge accounting and introduce more judgement to assess the effectiveness of a hedging relationship.
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New Standards and Amendments Effective in 2018
New standards and amendments
Recap of new standards and amendments
The classification, measurement and impairment provisions are to be applied retrospectively with some exceptions and contain numerous transition provisions. The restatement of prior periods is not required, and is permitted only if information is available without the use of hindsight. The general hedging provisions are to be applied prospectively with some exceptions and contain numerous transition requirements. An entity may choose as an accounting policy choice to continue to apply the hedge accounting requirements of IAS 39 instead of the requirements in IFRS 9, until the standard resulting from IASB’s dynamic risk management project is completed.
For additional information, refer to KPMG’s web article that also includes additional links to in-depth analysis.
In addition, the Board clarified that under IFRS 9 the accounting for non-substantial modifications of fixed rate financial liabilities requires entities to:
• recalculate the amortized cost of the modified financial liability by discounting the modified contractual cash flows using the original
effective interest rate; and
• recognize any adjustment in profit or loss.
If the initial application of IFRS 9 results in a change in accounting policy for these modifications or exchanges, then retrospective application is required, subject to particular transitional reliefs.
For additional information, refer to KPMG’s web article.
Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Amendments to IFRS 4)
The amendments to IFRS 4 introduced two approaches to address the temporary volatility as a result of the different effective dates of IFRS 9 and IFRS 17, the latter for which is effective for annual periods beginning on or after January 1, 2021.
The amendments provide a reporting entity (whose predominant activity is to issue insurance contracts) a temporary exemption from applying IFRS 9 until the earlier of (a) the application of IFRS 17; or (b) January 1, 2021 (to be applied at the reporting entity level) (referred to as the ‘temporary exemption’).
The amendments also give entities issuing insurance contracts the option to reclassify between profit and loss and other comprehensive
income, the difference between the amounts recognized in profit and loss under IFRS 9 and those that would have been reported under IAS 39
for designated financial assets (referred to as the ‘overlay approach’). This option will be in place until IFRS 17 comes into effect.
The amendments also include additional disclosure requirements that allows for comparability between companies that have applied IFRS 9 and
those that have chosen to defer its application.
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New Standards and Amendments Effective in 2018
New standards and amendments
Recap of new standards and amendments
In March 2017, the Office of the Superintendent of Financial Institutions (OSFI) issued an advisory articulating its expectation that life insurers
whose activities are predominately connected with insurance to apply the temporary exemption from IFRS 9 in annual periods beginning before
January 1, 2021. An exception is available for federally regulated life insurers if its federally regulated parent does not meet the predominance
test.
Additionally, relief is provided for investors in associates and joint ventures, by permitting a company to not apply uniform accounting policies
when the investee applies IAS 39 and the investor applies IFRS 9, or vice versa, when applying the equity method of accounting.
For additional information, refer to KPMG’s web article Insurance – IFRS 4 amendments.
Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2)
The amendments cover three accounting areas:
• Measurement of cash-settled share-based payments - the amendments clarify that a cash-settled share-based payment is measured using the same approach as for equity-settled share-based payments – i.e. the modified grant date method.
The new requirements do not change the cumulative amount of expense that is ultimately recognized, because the total consideration for a cash-settled share-based payment is still equal to the cash paid on settlement.
• Classification of share-based payments settled net of tax withholdings - some share-based payment arrangements permit or require the entity to withhold a portion of the shares that would otherwise be issued to the employee, and to pay the tax authorities on the employee’s behalf. The amendments clarify the conditions under which a share-based payment transaction with employees settled net of tax withholding is accounted for as equity-settled.
• Accounting for a modification of a share-based payment from cash-settled to equity-settled - the amendments clarify that at the modification date, the liability for the original cash-settled share-based payment is derecognized. Also at the modification date, the equity-settled share-based payment is measured at its fair value and recognized to the extent that the services have been received up to that date. Any differences are recognized immediately in profit or loss.
As a practical simplification, the amendments can be applied prospectively. Retrospective is permitted if information is available without the use of hindsight.
For additional information, refer to KPMG’s web article.
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New Standards and Amendments Effective in 2018
New standards and amendments
Recap of new standards and amendments
Foreign Currency Transactions – Advance Consideration (IFRIC Interpretation 22)
The Interpretation clarifies that the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the
related asset, expense or income (or part of it) is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability
arising from the payment or receipt of advance consideration. For transactions involving multiple payments or receipts, each payment or receipt
gives rise to a separate transaction date.
The Interpretation may be applied either:
• retrospectively; or
• prospectively to all assets, expenses and income in the scope of the Interpretation initially recognized on or after:
– the beginning of the reporting period in which the entity first applies the Interpretation; or
– the beginning of a prior reporting period presented as comparative information in the financial statements.
For additional information, refer to KPMG’s web article.
Transfers of Investment Property (Amendments to IAS 40)
The amendments clarify that:
• an entity shall transfer a property to, or from, investment property when, and only when, there is a change in use of a property supported by evidence that a change in use has occurred; and
• the list of circumstances of when a change in use has occurred is non-exhaustive.
The transitional provisions allow an entity to apply the amendments prospectively to changes in use that occur on or after the beginning of the
annual reporting period in which the entity first applies the amendments (the date of initial application). At the date of initial application, an entity
shall also reassess the classification of property held at that date and, if applicable, reclassify property to reflect conditions that exist at that date.
An entity is permitted to apply the amendments retrospectively, but only if it does not involve the use of hindsight.
For additional information, refer to KPMG’s web article.
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New Standards and Amendments Effective in 2018
New standards and amendments
Recap of new standards and amendments
Annual Improvements 2014 - 2016 Cycle
IAS 28 Investments in Associates and Joint Ventures: Measuring an associate or joint venture at fair value
The amendments to IAS 28 clarify that:
• a venture capital organization, or other qualifying entity, may elect to measure its investments in an associate or joint venture at fair value through profit or loss. This election can be made on an investment-by-investment basis; and
• a non-investment entity investor may elect to retain the fair value accounting applied by an investment entity associate or investment entity joint venture to its subsidiaries. This election can be made separately for each investment entity associate or joint venture.
IFRS 1 First-time Adoption of International Financial Reporting Standards
The amendments to IFRS 1 remove outdated exemptions for first-time adopters of IFRS.
For additional information, refer to KPMG’s web article.
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Current Quarter Financial Reporting Matters
Current Quarter Financial Reporting Matters
New Guidance – Amendments to IFRSs
Plan Amendment, Curtailment or Settlement (Amendments to IAS 19 Employee Benefits)
In February 2018, the IASB issued amendments to IAS 19 Employee Benefits,
clarifying that:
• on amendment, curtailment or settlement of a defined benefit plan, a
company now uses updated actuarial assumptions to determine its current
service cost and net interest for the period; and
• the effect of the asset ceiling is disregarded when calculating the gain or loss
on any settlement of the plan and is dealt with separately in other
comprehensive income (OCI)
Some entities may see major changes from the requirement to recalculate current
service cost and net interest for changes in the plan.
The amendments apply for plan amendments, curtailments or settlements that occur
on or after January 1, 2019. Earlier application is permitted.
For additional information, refer to KPMG’s web article.
Revised Conceptual Framework for Financial Reporting
In March 2018, the IASB published its revised Conceptual Framework for Financial
Reporting – the foundation on which the IASB develops new accounting standards.
The revised Framework is more comprehensive than the old one and covers all
aspects of standard setting from the objective of financial reporting, to presentation
and disclosures. Effective immediately, it largely codifies the Board’s recent thinking
– but it also introduces some new, untested concepts.
The main changes to the Framework’s principles have implications for how and when
assets and liabilities are recognized and derecognized in the financial statements. The
Conceptual Framework primarily serves as a tool for the IASB to develop standards
and to assist IFRIC in interpreting them. It does not override the requirements of
individual IFRSs.
For additional information, refer to KPMG’s web article.
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Current Quarter Financial Reporting Matters
Other Matters
LIBOR reforms and the accounting impacts
The UK’s Financial Conduct Authority recently indicated that market participants
should prepare for the likelihood that LIBOR will cease to exist in its current form by
the end of 2021. Impacting LIBOR-benchmarked contracts, it may be important to
think about possible accounting implications.
One issue to consider is the impact on existing hedging relationships. In particular, if
an entity has hedge designations whereby changes in LIBOR were designated as the
hedged risk, then a question arises whether hedge accounting should be
discontinued because of a change in the benchmark interest rate away from LIBOR.
Some of the potential accounting impacts are explored in our IFRS Newsletter: The
Bank Statement.
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Previous Quarters’ Financial Reporting Matters
Previous Quarters’ Financial Reporting Matters
New Guidance – Amendments to IFRSs
Prepayment features with Negative Compensation (Amendments to IFRS 9)
In October 2017, the IASB issued amendments to IFRS 9 clarifying the accounting
for financial assets with prepayment features that may result in negative
compensation.
For a debt instrument to be eligible for measurement at amortized cost or FVOCI,
IFRS 9 requires its contractual cash flows to meet the SPPI criterion – i.e. the cash
flows are ‘solely payments of principal and interest’.
Under IFRS 9, a prepayment option in a financial asset meets this criterion if the
prepayment amount substantially represents unpaid amounts of principal and
interest, which may include ‘reasonable additional compensation’ for early
termination of the contract.
Some prepayment options could result in the party that triggers the early termination
receiving compensation from the other party (negative compensation) – e.g. a lender
could receive an amount less than the unpaid amounts of principal and interest even
though the borrower chooses to prepay. In other cases, an event outside the control
of both parties may cause early termination.
Applying IFRS 9 would probably result in these instruments being measured at fair
value through profit or loss (FVTPL). The Board believed this to be inappropriate
because measuring them at amortized cost, using the effective interest method,
provides useful information about the amount, timing and uncertainty of their future
cash flows.
The amendment removes the word ‘additional’ so that negative compensation may
be regarded as ‘reasonable compensation’ irrespective of the cause of the early
termination. Financial assets with these prepayment features can therefore be
measured at amortized cost or at FVOCI if they meet the other relevant requirements
of IFRS 9.
The amendment is effective for annual periods beginning on or after January 1, 2019
with early adoption permitted. Retrospective application is required, subject to
relevant transitional reliefs.
For additional information, refer to KPMG’s web article.
Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28)
In October 2017, the IASB issued amendments to IAS 28 Investments in Associates
and Joint Ventures, clarifying that an entity applies IFRS 9 Financial Instruments
(including its impairment requirements) to long-term interests in an associate or joint
venture to which the equity method is not applied.
The amendment will affect companies that finance these entities with preference
shares or with loans for which repayment is not expected in the foreseeable future
(referred to as long-term interests or 'LTI'). This is common in the extractive and real
estate sectors.
In the amendments to IAS 28 and the accompanying example the IASB clarified that
LTI are in the scope of both IFRS 9 and IAS 28 and explain the annual sequence in
which both standards are to be applied. In effect, this is a three step annual process:
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Previous Quarters’ Financial Reporting Matters
• apply IFRS 9 independently, ignoring any prior years’ IAS 28 loss absorption;
• true-up past allocations – if necessary, prior years’ IAS 28 loss allocation is
trued-up in the current year because the IFRS 9 carrying value may have
changed. This may involve recognizing more prior years’ losses, reversing
these losses, or re-allocating them between different LTI instruments; and
• recognize current year equity share – any current year IAS 28 losses are
allocated to the extent that the remaining LTI balance allows. Any current
year IAS 28 profits reverse any unrecognized prior years’ losses and then
allocations against LTI.
The amendment applies for annual periods beginning on or after January 1, 2019,
with transitional reliefs. Early adoption is permitted.
For additional information, refer to KPMG’s web article.
Annual Improvements to IFRSs 2015-2017 Cycle
In December 2017, as part of its process to make non-urgent but necessary
amendments to IFRS, the IASB issued narrow-scope amendments to IFRS 3
Business Combinations and IFRS 11 Joint Arrangements, IAS 12 Income Taxes and
IAS 23 Borrowing Costs.
The amendments to IFRS 3 and IFRS 11 clarify how a company accounts for
increasing its interest in a joint operation that meets the definition of a business:
• if a party maintains (or obtains) joint control, then the previously held
interest is not remeasured; and • if a party obtains control, then the transaction is a business combination
achieved in stages and the acquiring party remeasures the previously held
interest at fair value.
The amendments to IAS 12 clarify that all income tax consequences of dividends
(including payments on financial instruments classified as equity) are recognized
consistently with the transactions that generated the distributable profits – i.e. in
profit or loss, OCI or equity.
The amendments to IAS 23 clarify that the general borrowings pool used to calculate
eligible borrowing costs excludes only borrowings that specifically finance qualifying
assets that are still under development or construction. Borrowings that were
intended to specifically finance qualifying assets that are now ready for their intended
use or sale – or any non-qualifying assets – are included in that general pool.
The amendments are effective for annual reporting periods beginning on or after
January 1, 2019, with early application permitted. Each of the amendments has its
own specific transition requirements.
For additional information, refer to KPMG’s web article.
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Previous Quarters’ Financial Reporting Matters
IFRIC Updates
Uncertainty over Income Tax Treatments (IFRIC Interpretation 23)
In June 2017, the IASB issued IFRIC Interpretation 23 Uncertainty over Income Tax
Treatments in response to diversity in practice for various issues in circumstances in
which there is uncertainty in the application of the tax law. While IAS 12 Income
Taxes provides requirements on the recognition and measurement of current and
deferred tax liabilities and assets, there is diversity in the accounting for income tax
treatments that have yet to be accepted by tax authorities.
The Interpretation requires:
• an entity to determine if it is probable that the tax authorities will accept the uncertain tax treatment;
• if it is not probable that the uncertain tax treatment will be accepted, measure the tax uncertainty based on the most likely amount or expected value depending on whichever method better predicts the resolution of the uncertainty;
• an entity to reassess the judgements and estimates applied if facts and circumstances change (e.g. as a result of examination or action by tax authorities, following changes in tax rules or when a tax authority’s right to challenge a treatment expires); and
• an entity to consider whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better predictions of the resolution.
The Interpretation is applicable for annual periods beginning on or after January 1,
2019 and may be applied on a fully retrospective basis, if this is possible without the
use of hindsight, or on a modified retrospective basis, with an adjustment to equity
on initial application. Earlier application is permitted.
For additional information, refer to KPMG’s web article.
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Looking Ahead
Looking Ahead
IFRS 16 Leases
The year ahead
The effective date of the new Leases standard is less than a year away. IFRS 16
represents a fundamental change in lease accounting. Entities are encouraged to
begin the implementation process if they haven’t already done so.
Companies that have made headway on their IFRS 16 conversion projects have
made some unexpected discoveries about the implications related to
implementation.
Some companies have found that the standard enhances some key earnings metrics
and others have concluded that some of the practical expedients are not as
advantageous as they first thought.
Some of the challenges and insights that have been seen in the implementation
stage include:
• creating an inventory of lease contracts and extracting the data from the lease
contracts: this process will take time and is process-heavy, so running parallel
work streams to keep the project on track will be important, especially if your
project plan includes a software implementation; and
• identification of embedded leases: under the existing standard it makes little
difference whether a contract is classified as an operating lease or as a
service. But it does under the new standard. The analysis of whether a
component of a contract meets the definition of a lease is proving more
difficult than anticipated.
Leases under IFRS 16 – a recap
IFRS 16 eliminates the current dual accounting model for lessees, which
distinguishes between on-balance finance leases and off-balance sheet operating
leases. Instead, IFRS 16 introduces a single, on-balance sheet accounting model that
is similar to current finance lease accounting. And while lessor accounting remains
substantially similar to current practice – i.e., lessors continue to classify leases as
finance and operating leases, there are some minor differences, including the fact
that lessors look to the new Revenue Standard to split the lease component of a
contract from non-lease components.
All entities that lease major assets for use in their business will see an increase in
reported assets and liabilities. In addition, entities will also now recognize a front-
loaded pattern of expense for most leases, even when they pay constant annual
rentals. This will affect a wide variety of organizations across all industries that lease
real estate, equipment, and vehicles. The larger the lease portfolio, the greater the
impact on key reporting measures.
The new standard makes the distinction between contracts that meet the definition
of a lease rather than a service contract even more critical, as leases will now be
recognized on the balance sheet. There may be a number of arrangements that are
currently accounted for as leases that fall outside the new definition of a lease
introduced in IFRS 16.
The new definition also increases the focus on who controls the use of the
underlying asset throughout the term of the arrangement. On transition to IFRS 16,
companies can choose whether to apply a practical expedient to ‘grandfather’ their
previous assessment of which existing contracts are, or contain, leases. Our
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Looking Ahead
Definition publication provides a detailed analysis of the key elements of the lease
definition and the related transition provisions.
Lessee Accounting
For each major lease, a lessee will recognize a liability for the present value of future
lease payments. The lease liability will be measured at amortized cost using the
effective interest rate, which creates a front-loaded interest expense. The lessee will
also recognize a ‘right-of-use’ asset, which will be measured at the amount of the
lease liability plus initial direct costs, prepaid lease payments, and estimated costs to
dismantle, less any incentives received. Lessees will generally depreciate the right-
of-use asset on a straight-line basis.
Additionally, IFRS 16 introduces a requirement to reassess key judgements, such as
lease term, at each reporting date, which is a significant change from current
guidance. It is no longer possible to compute a lease amortization schedule on lease
commencement and roll that schedule forward at each reporting date. Instead,
companies will need to consider whether to re-measure the lease liability and right-
of-use asset at each reporting date. Significant judgement will likely be needed in
determining whether there is a change in relevant factors, or a change in the lessee’s
economic incentive to exercise or not exercise renewal or termination options.
What Discount Rate?
A key estimate in IFRS 16 relates to the discount rate used to measure the present
value of the lease payments. While the definitions of the discount rate are consistent
with IAS 17 Leases, the application of these definitions in the new standard may be
complex, especially for lessees, as a discount rate will have to be determined for
most leases previously classified as operating leases. The exceptions are leases for
which the lessee applies the recognition exemptions. The determination of the
appropriate discount rate will be particularly demanding at transition, especially if
IFRS 16 is adopted retrospectively.
The discount rate affects the amount of the lessee’s lease liabilities and a host of key
financial ratios. The financial statement impacts of having a higher or lower discount
rate may be pervasive. For example, the discount rate will impact the allocation of
total expense between depreciation and interest throughout the lease term. A higher
discount rate will reduce depreciation and increase interest expense in each reporting
period. Estimating discount rates and documenting the basis of those estimates will
be a major task. To help you prepare to adopt IFRS 16, KPMG has published, Leases
Discount Rates – What’s the correct rate?, which provides an overview of how to
determine the appropriate discount rate and how this will affect your financial
statements.
What’s included in the lease liability?
The lease liability is measured at the present value of the lease payments. But the
determination of which lease payments should be included in the lease liability,
initially and subsequently will determine the scale of the impact of the new standard
for lessees.
One key difference from current practice is that certain lease payments are
reassessed over the term of the lease, and the lease liability adjusted accordingly.
This introduces new balance sheet volatility.
It also requires new systems and processes to determine the revised lease
payments and recalculate the lease liability.
Identifying the relevant payments to include in the liability is key to measuring the
lease liability. KPMG has published Lease payments – What’s included in the lease
liability? which provides an overview of how to determine the lease payments.
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Looking Ahead
Effective Date and Transition
The standard is effective for annual reporting periods beginning on or after January 1,
2019.
The choice of transition options will have a significant impact on the extent of data
gathering and the timing of system and process changes. Upon adoption, an entity
will be able to choose either of the following transition approaches:
(a) Retrospective approach
An entity may choose to retrospectively adjust all prior periods presented.
(b) Modified retrospective approach
An entity may choose not to restate comparatives and instead adjust opening
retained earnings at the date of initial application.
While there are two broad transition approaches, there are many individual options
and practical expedients that can be elected independently of each other, some on a
lease-by-lease basis. Most of the transition options involve a trade-off between the
costs of implementation and the comparability of the resulting financial information.
For lessees with significant lease portfolios, it may be worthwhile to model the
different transition options early since the decisions made on transition will continue
to affect the company’s financials until the last lease in place on transition has
expired. Before the effective date, companies will need to gather significant
additional data about their leases, and make new estimates and calculations, as well
as decisions about transition. For some companies, a key challenge will be gathering
the required data. For others, more judgemental issues will dominate – e.g.,
identifying which transactions contain leases.
For additional information, refer to KPMG’s IFRS – Leases hot topics page and IFRS 16 Illustrative Disclosures Supplement
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Looking Ahead
IFRS 17 Insurance Contracts
In May 2017, the IASB issued the new insurance contracts standard IFRS 17 which
will bring fundamental changes to insurance accounting. The new standard will give
users of financial statements a whole new perspective, and the ways in which
analysts interpret and compare companies will change. The impact on insurers is
significant, but will vary between insurers and jurisdictions.
Benefits of the new standard include increased transparency about the profitability of
new and in-force business which will provide more insight into an insurer’s financial
health. Other effects may include greater volatility in financial results and equity due
to the use of current discount rates and assumptions around future cash flows.
Other changes include:
• separate presentation of underwriting and finance results, providing information
surrounding the sources of profit and quality of earnings;
• premium volumes will no longer drive the ‘top line’ as investment components
and cash received are no longer considered to be revenue;
• accounting for options and guarantees will be more consistent and transparent.
IFRS 17 applies not only to entities that are generally considered insurance entities,
but to all entities that:
• issue insurance or reinsurance contracts
• hold reinsurance contracts; or
• issue investment contracts with a discretionary participation feature (provided
that they also issue insurance contracts).
IFRS 17 introduces:
• a single measurement model based on a current fulfillment value that
incorporates available information in a way that is consistent with observable
market information; and
• a single revenue recognition principle to reflect services provided.
IFRS 17 becomes effective January 1, 2021, however, the timescale will be a
challenge and implementation will require the coordination of several functions,
including Finance, Actuarial, and IT as well as the introduction of new or upgraded
systems, processes and controls.
IFRS 17 has already raised a variety of implementation questions from stakeholders.
To help support implementation and reduce the potential for diversity in practice, the
IASB has set up a Transition Resource Group (TRG), which held its first substantive
meeting in February 2018. The TRG discussed several questions submitted by
stakeholders, including:
• separating insurance components from a single contract;
• determining the boundary of certain insurance and reinsurance contracts; and
• identifying coverage units for the CSM allocation.
The IASB was informed of the TRG discussion and was not asked to make a
decision.
To assist in the implementation of IFRS 17 in Canada, the Accounting Standards
Board (AcSB) also established a TRG, which held its first meeting in February 2018.
Our new online magazine Insurance – Transition to IFRS 17 tracks the TRG's
activities and contains our summary of and observations on the topics discussed.
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Looking Ahead
Our new guide Insurers - Illustrative disclosures provides a comprehensive illustration
for financial statements for an annual period beginning on January 1, 2021, when
IFRS 17 Insurance Contracts and IFRS 9 Financial Instruments are applied for the first
time.
For additional information, refer to KPMGs’ webcast series, Navigating the new
world, KPMG Insurance Hot Topics IFRS - Insurance, KPMG’s web article, and
publications Insurance Contracts – First Impressions, Insurance – Transition to IFRS
17 and Insurers – Illustrative disclosures.
Update on Financial Instruments Projects
Financial Instruments with Characteristics of Equity (FICE)
IAS 32 Financial Instruments: Presentation includes requirements for the
classification of financial instruments between liabilities and equity. These binary
classification requirements result in significant practice issues when applied to many
financial instruments with characteristics of equity – other than, for example, typical
non-redeemable common shares that pay discretionary dividends.
In January 2018, the Board discussed an issue raised on the pre-ballot draft of the
FICE Discussion Paper, relating to how the previously described Gamma Approach
classifies non-derivative instruments with a complex payoff structure. The issue
arises when an entity has the option to limit the amount of a claim to that entity’s
available economic resources (for example, an option to settle a claim by delivering a
fixed number of shares), but also has the option to settle at an amount that is
affected by other variables that are independent of the entity’s economic resources. The Board discussed whether such an instrument could be analysed as an equity
host and an embedded derivative asset if the issuer held the option to settle the
claim.
In cases where the entity does not have the option to limit the amount of a claim to
the entity’s available economic resources, the instrument would be analysed as a
liability host and an embedded derivative. This position is consistent with the Board’s
preliminary view on contingent events.
The Board tentatively decided:
• before proposing any particular accounting requirements, to raise the issue
in the Discussion Paper and seek feedback on whether separating
embedded derivatives may be a potential solution; and
• to raise a question in the Discussion Paper about whether and how the
attribution requirements may help provide information about complex
payoffs if the embedded derivative is not separated from the equity host
contract.
The Board expects to publish the Discussion Paper in Q2 of 2018.
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Looking Ahead
Dynamic Risk Management
In December 2017, the Board decided to: (1) focus first on developing a core model
for the most important issues; and (2) to seek feedback on the feasibility of the core
model. The manner in which feedback is obtained will be determined at a later date;
and to (3) address the non-core issues as a final step.
During February 2018, the Board discussed the role of the asset profile within the
dynamic risk management model; in particular, the application of qualifying criteria to
the asset profile, as well as designation of items within the asset profile and
documentation requirements. The Board decided the staff should continue
developing the model.
During March 2018 the Board discussed the role of the target profile within the
dynamic risk management model; in particular, what is a target profile, how it is
determined, consistency of the asset profile and target profile, and the time horizon
of the target profile. The Board tentatively decided the staff should continue
developing the model.
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Amended and new IFRSs effective date
Amended and new IFRSs effective date
Standards not yet Effective, but Available for Early Adoption
A reminder of standards not yet effective for any reporters, but available for early adoption are listed in this table.
Effective for years ending
Standards KPMG’s guidance
December 31, 2019
IFRS 16 Leases Web article (with links to in-depth analysis)
Uncertainty over Income Taxes (IFRIC Interpretation 23) Web article
Annual Improvements 2015 - 2017 Cycle • IAS 23 Borrowing Costs: Borrowing costs eligible for capitalization • IFRS 3 Business Combinations and IFRS 11 Joint Arrangements: Obtaining control (or
joint control) of a business that is a joint operation if the company already holds an interest in that business.
IAS 12 Income Taxes: Consequences of payments on instruments classified as equity
Web article
Long-term interests in associates and joint ventures (Amendments to IFRS 9 and IAS 28) Web article
Prepayment features with Negative Compensation (Amendments to IFRS 9) Web article
Plan Amendment, Curtailment or Settlement (Amendments to IAS 19 Employee Benefits) web article
December 31, 2021 IFRS 17 Insurance Contracts IFRS Newsletter: Insurance and KPMG’s website IFRS –
Insurance.
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Amended and new IFRSs effective date
Standards Available for Optional Adoption
The IASB has decided to defer the effective date for these amendments indefinitely. Adoption is still permitted.
Standards KPMG’s guidance
Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)
Web article
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IASB Work Plan
IASB Work Plan These tables are intended to act as an outlook of the expected final publication date of current IASB projects that may impact your financial statements in the future.
IASB’s research projects and Agenda consultation as well as Interpretation (IFRIC) projects are not included in these tables
Standard-setting and related projects Next Milestone Within 3 months Within 6 months After 6 months KPMG’s Guidance
Rate-regulated Activities Discussion Paper or
Exposure Draft H1 2019 In the Headlines, Issue 2014/20
Disclosure Initiative – Definition of Material
(Amendments to IAS 1 and IAS 8)
Exposure Draft
feedback April 2018
Web article
Management Commentary Exposure Draft TBD
Published Discussion Papers (DP’s) Next Milestone Within 3 months Within 6 months After 6 months
Dynamic Risk Management Core Model H1 2019 IFRS Newsletter: Financial Instruments
Financial Instruments with Characteristics of Equity Discussion Paper June 2018
Goodwill and Impairment Discussion Paper or
Exposure Draft H2 2018
Primary Financial Statements Discussion Paper or
Exposure Draft H1 2019
Disclosure Initiative – Principles of Disclosure
Discuss Remaining
Issues June 2018
Disclosure Initiative – Targeted Standards-level Review of
Disclosures Decide Project Direction June 2018
Business Combinations under Common Control Discussion Paper H1 2019
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IASB Work Plan
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate
as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
Narrow-scope Amendments and Interpretations of IFRS
Standards Next Milestone Within 3 months Within 6 months After 6 months KPMG Guidance
Accounting Policies and Accounting Estimates
(Proposed Amendments to IAS 8) Decide Project Direction TBD
Classification of Liabilities
(Amendments to IAS 1) IFRS Amendment H2 2018 Web article
Definition of a Business (Amendments to IFRS 3) IFRS Amendment June 2018 Web article
Availability of a refund
(Amendments to IFRIC 14) IFRS Amendment TBD Web article
Property, Plant and Equipment: Proceeds before Intended
Use (Amendments to IAS 16) IFRS Amendment TBD Web article
Fees in the ’10 per cent’ test for derecognition
(Amendments to IFRS 9) Exposure Draft
TBD
Accounting Policy Changes (Amendments to IAS 8 and
IAS 34)
Exposure Draft Feedback
H2 2018
Subsidiary as First-time Adopter (IFRS 1) Exposure Draft TBD
Taxation in Fair Value Measurements (IAS 41) Exposure Draft TBD